DoC plans to regulate interest rates offered by cooperatives

KATHMANDU, DEC 14 -

With increasing incidents of cooperatives misusing depositors’ money, the Department of Cooperative (DoC) is planning to control interest rates offered by cooperatives on deposits. In general, cooperatives offer higher rates than bank and financial institutions (BFIs).

The DoC is considering fixing interest rates offered by cooperatives on deposits in line with those offered by commercial banks. The move, according to the DoC, is aimed at curbing cooperatives’ lending to non-productive sectors. “We are bringing a new policy under the assistance of the Nepal Rastra Bank and the Finance Ministry,” said DoC Registrar Kedar Neupane.

With commercial banks slashing interest rates on deposits, people have started to divert their deposits to cooperatives where the rates over 17 percent. Commercial banks offer 3-6 percent interest on deposits on an average.

Luring the general public by offering higher interest rates, cooperatives have become the second highest deposit collector after commercial banks. The latest statistics show deposits in cooperatives are much higher than that in development banks and finance companies.

In last fiscal year, cooperatives’ deposits surged by a whopping Rs 22 billion. DoC officials say with huge deposits being parked in poorly regulated cooperatives, there is risk of the money being misused.

BFIs, regulated by the central bank, generally fix interest rates based on multiple factors such as liquidity situation, loan demand and operating cost. But in cooperatives’ case, these measures are not taken into consideration while fixing interest rates. Generally, cooperatives collect deposits at higher rates and lend at much higher rates.

With the central bank tightening BFIs’ lending to the realty sector, cooperatives have become a good source of loans for realty traders.

Regulatory measures such as income source disclosure provision also prompted people to opt for cooperatives. “Current troubles in some cooperatives arose as the people failed to distinguish between cooperatives and banks,” said Neupane. According to the DoC, there is a need for risk management fund and deposit insurance to safeguard depositors. Liquidity crisis in big cooperatives like Oriental, Guna and Exim is due to their overexposure to the realty sector. Neupane said the provision of the fund and insurance could minimise the risk of fund misuse.

Min Raj Kadel, president of the Nepal Federation of Saving and Credit Cooperative Unions, said effective implementation of the PEARL system recommended by the World Council of Credit Unions could help minimise the risk.

He suggested installing a stabilising fund and putting in place a provision of soft loans for the revival of cooperatives facing liquidity crisis.

Source: The Kathmandu Post